VAN OORD DREDGING AND MARINE CONTRACTORS, MUMBAI V. ADDL DIT (IT) RG 2, MUMBAI

ITA 7589/MUM/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2649 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 9 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 14-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 24-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J SHRI N K CHAND
• Keywords: Depreciation; Transfer pricing; Salary income; Double taxation relief; International transaction; Initiation of penalty proceedings; Bad and doubtful debts; Unabsorbed depreciation
• Section: 143(3); 92D; 92E; 28

Judgement Text

VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L , MUMBAI . . , , BEFORE SHRI G S PANNU , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICI AL MEMBER AND ITA NO. : 7 5 8 9 /MUM/201 2 ( A SSESSMENT YEAR: 200 9 - 1 0 ) VAN OORD DREDGING AND MARINE CONTRACTORS BV , 2 ND FLOOR, CENTRAL PLAZA, CST ROAD, KALINA, MUMBAI - 400 0 98 .: PAN : AA AC H 3500 M VS A DDL . D I RECTOR OF INCOME - TAX (INTERNATIONAL TA XATION) - RANGE - 2, FIRST FLOOR, ROOM NO.108, SCIND H IA HOUSE, BALLARD ESTATE, MUMBAI - 400 038 (APPELLANT) (RESPONDENT) APPLICANT BY : SHRI PORUS KAKA RESPONDENT BY : J SHRI N K CHAND /DATE OF HEARING : 11 - 0 7 - 201 6 / DATE OF PRONOUNCEMENT : 07 - 1 0 - 2016 ORDER , : PER AMIT SHUKLA , J.M. : THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST FINAL ASSESSMENT ORDER DATED 30.10.2012 , PASSED UNDER SECTION 143(3) R.W.S. 144 C(13) IN PURSUANCE OF DIRECTION GIVEN BY THE DISPUTE RESOLUTION PANEL (DRP) UNDER SECTION 144C(5) VIDE ORDER DATED 29.09.2012 , FOR THE ASSESSMENT YEAR 2009 - 10. IN THE GROUNDS OF APPEAL, THE ASSESSEE HAS RAI SED FOLLOWING GROUNDS: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN AW, THE LEARNED AO, BASED ON DIRECTIONS OF DRP ERRED IN MAKING ADDITION OF RS.24,80,29,144 (I.E. MANAGEMENT SERVICE FEES OF RS.22,57,89,998 AND REIMBURSEMENT OF VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 2 SALARY REC EIVED RS.2,22,39,146) TO THE TOTAL INCOME OF THE APPELLANT. T AXABILITY OF MANAGEMENT SERVICE FEES OF RS.22,57,89,998 2. THE LEARNED AO/DRP ERRED IN LAW AND IN FACTS, IN HOLDING THAT THE MANAGEMENT SERVICE FEES RECEIVED BY THE APPELLANT ARE TAXA BLE AS ROYALTY UNDER ARTICLE 12(4) OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND NETHERLANDS (INDIA NETHER L ANDS TREATY), THEREBY MAKING AN ADDITION OF RS.22,57,89,998 TO THE INCOME OF THE APPELLANT. 3 . THE LEARNED AO/DRP FAILED TO APP RECIATE THE FACT THAT THE SERVICES PROVIDED BY THE APPELLANT ARE IN THE NATURE OF BUSINESS SUPPORT AND ADMINISTRATION SERVICES AND ARE NOT IN NATURE OF SHARING OF INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL AND SCIENTIFIC EXPERIENCE. 4 . THE LEARNED AO/D RP FAILED TO APPRECIATE THAT SERVICES RENDERED BY THE APPELLANT ARE IN THE NATURE OF BUSINESS SUPPORT AND ADMINISTRATION SERVICES AND NOT IN THE NATURE OF TECHNICAL OR CONSULTANCY SERVICES. 5. THE LEARNED AO/DRP FAILED TO APPRECIATE THAT THE SERVICES REND ERED BY THE APPELLANT DO NOT MAKE AVAILABLE ANY TECHNICAL KNOWLEDGE, EXPERIENCE, SKI, KNOW - HOW OR PROCESSES AND HENCE IS NOT TAXABLE IN VIEW OF THE INDIA NETHER L ANDS TREATY. 6. THE LEARNED AO/DRP FAILED TO APPRECIATE THE FACT THAT BUSINESS SUPPORT AND ADMINISTRATION SERVICE FEES RECEIVED BY THE APPELLANT ARE WITHOUT ANY MARKUP AND CONSTITUTE PURE ALLOCATION OF COST WHICH IS NOT TAXABLE AS ROYALTY NOR FEES FOR TECHNICAL SERVICES UNDER THE ACT. 7. THE LEARNED AO/DRP FAILED TO APPRECIATE THAT FOR THE SER VICES RENDERED BY THE APPELLANT TO QUALIFY AS ROYALTY, THE SAME SHOULD PROVIDE KNOW - HOW TO THE RECIPIENT. 8. THE LEARNED AO/DRP ERRED IN LAW AND IN FACTS, IN HOLDING THAT SERVICES RENDERED BY THE APPELLANT INVOLVE DEVELOPMENT AND TRANSFER OF A TECHNICAL P AN OR TECHNICAL DESIGN. 9. THE LEARNED AO/DRP ERRED IN ADOPTING AN APPROACH BASED ON UNSUBSTANTIATED PRESUMPTIONS, SURMISES, ALLEGATIONS AND WITHOUT CONSIDERING THE SUBMISSIONS (INCLUDING CASE LAWS) PUT FORTH BY THE APPELLANT, FOR THE VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 3 PURPOSE OF MAKING AN ADDITION TO THE INCOME OF THE APPELLANT ON ACCOUNT OF MANAGEMENT SERVICES FEES. TAXABILITY OF THE REIMBURSEMENT OF SALARY RECEIVED OF RS.2,22,39,146 10. THE LEARNED AO/DRP ERRED IN LAW AND IN FACTS IN HOLDING THAT THE REIMBURSEMENT OF SALARY EXPENSES RE CEIVED BY THE APPELLANT ARE TAXABLE AS FEES FOR TECHNICAL SERVICES UNDER ARTICLE 12(5)(A) OF THE INDIA - NETHERLANDS TREATY. 11. THE LEARNED AO/DRP FAILED TO APPRECIATE THE FACT THAT THE CREW MEMBERS PROVIDED ON DREDGERS BY THE APPELLANT IS NEITHER SHARING OF ANY EXPERIENCE AND INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL AND SCIENTIFIC KNOWLEDGE AND EXPERIENCE GATHERED OVER THE YEARS BY THE APPELLANT NOR IN FURTHERANCE OF SHARING SUCH EXPERIENCE AND INFORMATION. 12. THE LEARNED AO/DRP ERRED IN APPRECIATIN G THE FACT THAT THE REIMBURSEMENT OF SALARY RECEIVED BY THE APPELLANT DOES NOT HAVE ANY NEXUS WITH THE BUSINESS SUPPORT AND ADMINISTRATION SERVICES RENDERED BY IT. 13. THE LEARNED AO/DRP ERRED IN APPRECIATE THE FACT THAT THE REIMBURSEMENT OF SALARY RECEIV ED BY THE APPELLANT ARE WITHOUT ANY MARKUP AND CONSTITUTED PURE REIMBURSEMENTS WHICH ARE NOT TAXABLE AS FEES FOR TECHNICAL SERVICES UNDER THE ACT. SET - OFF OF UNABSORBED DEPRECIATION OF RS.23,65,99,081 AGAINST THE ADDITIONS MADE TO THE INCOME OF THE APPELL ANT 1 4. THE LEARNED AO ERRED IN LAW AND IN FACTS IN ADJUSTING THE UNABSORBED DEPRECIATION OF RS.23,65,99,081 AGAINST THE ADDITIONS MADE TO THE INCOME OF THE APPELLANT BEING, ROYALTY AND FEES FOR TECHNICAL SERVICES INCOME TAXABLE ON GROSS BASIS WITHOUT DE DUCTION OF EXPENSES AND DEPRECIATION ALLOWANCE. 15. THE LEARNED AO FAILED TO APPRECIATE THE FACT THAT NO DEDUCTIONS AND ALLOWANCES UNDER SECTION 28 TO 44C AND SECTION 57(1) ARE ALLOWED AGAINST THE INCOME TAXABLE UNDER SECTION 115A OF THE ACT, ON GROSS BAS IS AS ROYALTY AND FEES FOR TECHNICAL SERVICES. 16. THE LEARNED AO FAILED IN APPRECIATING THAT BROUGHT FORWARD DEPRECIATION ALLOWANCE FOR THE CURRENT YEAR BY VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 4 VIRTUE OF SECTION 32(2) OF THE ACT AND HENCE AS PER SECTION 115A(3), CANNOT BE ABSORBED/SET - OFF AG AINST ROYALTY AND FEES FOR TECHNICAL INCOME TAXABLE ON GROSS INCOME BASIS. SET - OFF BROUGHT FORWARD BUSINESS LOSSES OF RS.5,55,14,086 AGAINST THE ADDITIONS MADE IN THE INCOME OF THE APPELLANT 17. THE LEARNED AO ERRED IN LAW IN FACTS IN ADJUSTING THE BROUG HT FORWARD BUSINESS LOSSES OF RS.5,55,14,086 AGAINST THE ADDITIONS MADE AS ROYALTY AND FEES FOR TECHNICAL SERVICES INCOME. 18. THE LEARNED AO FAILED TO APPRECIATE THE FACT THAT INCOME EARNED BY THE APPELLANT FROM RENDERING MANAGEMENT SERVICES TO ITS GROUP ENTITIES OR REIMBURSEMENT OF SALARY RECEIVED WILL BE CLASSIFIED UNDER THE HEAD INCOME FROM OTHER SOURCES. ACCORDINGLY, THE LEARNED AO ERRED IN SETTING OFF BROUGHT FORWARD LOSSES AGAINST THE INCOME EARNED BY THE APPELLANT UNDER THE HEAD INCOME FROM OTHE R SOURCES. INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271G OF THE ACT 19. THE LEARNED AO ERRED IN INITIATING THE PENALTY PROCEEDINGS UNDER SECTION 271G OF THE ACT, WHICH IS APPLICABLE IN CASES OF FAILURE TO FURNISH INFORMATION OR DOCUMENTS AS REQUI RED UNDER SECTION 92D OF THE ACT, WITHOUT APPRECIATING THE FACT THAT THE INTERNATIONAL TRANSACTION ENTERED BY THE APPELLANT ARE NOT TAXABLE IN INDIA. 20. THE LEARNED AO ERRED IN INITIATING PENALTY PROCEEDING UNDER SECTION 271 G OF THE ACT, WITHOUT CONSIDE RING THE FACT THAT NO SHOW CAUSE NOTICE FOR FURNISHING DETAILS WITH REGARD TO APPROPRIATENESS OF THE DOCUMENTATION MAINTAINED FOR INTERNATIONAL TRANSACTIONS WAS ISSUED TO THE APPELLANT. INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271BA OF THE ACT 21. THE LEARNED AO HAS ERRED IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271BA OF THE ACT, WHICH IS APPLICABLE IN CASES OF FAILURE TO FURNISH REPORT UNDER SECTION 92E OF THE ACT, WITHOUT CONSIDERING THE FACT THAT THE INTERNATIONAL TRANSACTION ENTERED BY T HE APPELLANT ARE NOT TABLE TRANSACTIONS. VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 5 INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT 22. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO ERRED IN LAW BY INITIATING PENALTY PROCEEDINGS UNDER SECTION 2 71(1)(C) OF THE ACT, WHEN THE APPELLANT HAD MADE FULL AND TRUE DISCLOSURES BOTH, IN RETURN OF INCOME AND DURING ASSESSMENT PROCEEDINGS . 2. THUS, THE MAIN ISSUES WHICH HAVE BEEN RAISED BY WAY OF AFORESAID GROUNDS ARE: FIRSTLY , T AXABILITY OF MANAGEMENT S E RVICE F EES OF RS.22,57,89,998/ - RECEIVED BY THE ASSESSEE FROM ITS INDIAN ENTITY AS ROYALTY UNDER ARTICLE 12(4) OF INDIAN - NETHERLANDS TREATY; S ECONDLY , TAXABILITY OF REIMBURSEMENTS OF SALARY RECEIVED BY THE ASSESSEE FROM THE INDIAN ENTITY WHICH HAS BEEN TAXED AS FEE FOR TECHNICAL SERVICES UNDER ARTICLE 12(5) OF DTAA; THIRDLY , SET OFF OF UNABSORBED DEPRECATION OF RS.23,65,99,081/ - AND SET OFF BROUGHT FORWARD OF BUSINESS LOSSES OF RS.5,55,14,086/ - AGAINST THE ADDITIONS MADE TO THE INCOME OF THE ASSESSEE . LASTLY, GROUNDS ( NOS. 19 TO 22) RELAT ING TO INITIATION OF PENALTY PROCEEDINGS UNDER VARIOUS SECTIONS . THE LAST SET OF GROUNDS A RE PRE - MATURE AND DOES NOT WARRANT ANY ADJUDICATION AT THIS STAGE , THEREFORE, AS ADMITTED BY BOTH THE PARTIES GROUND NOS.19 TO 22 ARE TO BE TREATED AS INFRUCTUOUS . 3. BRIEF FACTS AND THE BACKGROUND OF THE CASE ARE THAT, THE ASSESSEE, (HEREINAFTER REFERRED TO AS VODMC) IS A COMPANY INCORPORATED IN NETHER L ANDS AND IS ELIGIBLE FOR BENEFITS OF VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 6 INDO - NETHERLAND DTAA AS PER ARTICLE 4. VODMC IS PRIMARILY INTERNATIONAL DREDGING CONTRACTOR AND IS ENGAGED IN THE BUSINESS OF UNDERTAKING CAPITAL DREDGING, MAINTENANCE OF DREDGING PROJECTS AND OTHER DREDGING RELATED ACTIVITIES. HOWEVER, DURING THE YEAR UNDER CONSIDERATION, I.E. AY 2009 - 10 THERE WERE NO DREDGING CONTRACTS EXECUTED BY VODMC IN INDIA. THUS, ASSESSEE HAD NOT EARNED ANY INCOME FROM CONTRACTUAL OPERATIONS IN INDIA IN THE RELEVANT ASSESSMENT YEAR EXCEPT FOR RECOVERY OF BAD DEBTS OF RS.50,00,068/ - . VODMC HAD ENTERED INTO SERVICES AGREE MENT WITH VAN OORD INDIA PRIVATE LIMITED ( VOIPL), UNDER WHICH IT HAS PROVIDED CERTAIN ASSISTANCE AND SUPPORT ON CONTINUOUS BASIS TO VOIPL IN THE FI E LD OF PERSONNEL AND ORGANIZATION, OPERATION SUPPORT, QUALITY, HEALTH, SAFETY AND ENVIRONMENT, DESIGNATED PERSONNEL OFFSHORE, INFORMATION TECHNOLOGY, ESTIMATION AND ENGINEERING, MARKETING AND ADMINISTRATIVE SERVICES IN CONNECTION WITH THE OPERATIONS OF THEIR BUSINESS OF MARINE CONSTRUCTION AND RELATED ACTIVITIES. VODMC ALSO PROVIDED CERTAIN CREW MEMBERS TO VOI PL. IN THE NO TES TO THE COMPUTATION OF INCOME FILED ALONG WITH THE RETURN OF INDIA , THE ASSESSEE HAD GIVEN FOLLOWING NOTE: DURING THE FINANCIAL YEAR ENDED MARCH 31, 2009, VAN OORD DREDGING AND MARINE CONTRACTOR BV (VODMC), NETHERLANDS HAS PROVIDED CERTAIN BUSINESS MANAGEMENT TO VAN OORD INDIA PRIVATE THE ABOVE SERVICES HAVE BEEN RENDERED ENTIRELY FROM OUTSIDE INDIA AND NO ROLE IS PLAYED BY VODMCS PROJECT OFFICE, IN RENDERING THE SAID SERVICES. SINCE, VODMCS PROJECT OFFICE HAS NOT PLAYED ANY ROLE IN REND ERING THE ABOVE SERVICES TO COIPL, THE AMOUNT CHARGED TO VOIPL INDIA HAS NOT BEEN INCLUDED IN ITS BOOKS OF ACCOUNTS. FOR THE ABOVE SERVICES, VODMC HAS CHARGED RS.225,789,998 ON VOIPL. VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 7 THE ASSESSEES MAIN CONTENTION HAD BEEN THAT, THE SERVICES RENDERED I N PURSUANCE OF THE SERVICE AGREEMENT ARE NOT IN THE NATURE OF FTS UNDER THE INDO - DUTCH DTAA , BECAUSE THERE IS NO MAKE AVAILABLE OF ANY TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW HOW OR PROCESS, ETC. THAT APART, IT WAS STATED THAT VODMCS PROJECT OF FICE HAS NOT PLAYED ANY ROLE IN RENDERING OF ANY OF THE ABOVE SERVICES, THEREFORE, SAME ARE NOT ATTRIBUTABLE TO ITS PROJECT OFFICE ALSO AND THUS , ON THIS GROUND ALSO THE SAME IS NOT TAXABLE IN INDIA. THE ASSESSEE WAS REQUIRED TO FURNISH THE DETAILS AND THE NATURE OF BUSINESS MANAGEMENT SERVICES PROVIDED AND THE BASIS OF ALLOCATION OF COST OF SERVICES TO THE INDIAN ENTITY AND WAS FURTHER REQUIRED TO JUSTIFY , AS TO WHY THE SAME SHOULD NOT BE HELD TAXABLE IN INDIA. IN RESPONSE TO THE SAME, THE ASSESSEE FILED I TS DETAILED REPLY VIDE LETTER DATED 18.11.2011, THE CONTENT OF WHICH HAS PRODUCED BY THE LD. ASSESSING OFFICER FROM HIS ORDER FROM PAGES 3 TO 8 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER EXAMINED THE CONTENT OF THE SERVICE AGREEMENT ENTERED BY THE VO DMC AND VOIPL ON 1 ST APRIL, 2004 AND NOTED THE FOLLOWING RELEVANT PORTION: - SERVICE TO BE PERFORMED : DURING THE TERM OF THIS AGREEMENT, THE SERVICE COMPANY SHALL ON A CONTINUING BASIS, PROVIDE THE SERVICE RECIPIENT COMPANY WITH ASSISTANCE AND SUPPORT IN THE FIELD OF PERSONNEL AND ORGANIZATION, OPERATION SUPPORT, QUALITY, HEALTH, SAFETY AND ENVIRONMENT, DESIGNATED PERSONNEL OFFSHORE, INFORMATION TECHNOLOGY, ESTIMATION AND ENGINEERING, MARKETING AND ADMINISTRATIVE SERVICES IN CONNECTION WITH THE OPERATIONS OF THEIR BUSINESS OF MARINE CONSTRUCTION AND RELATED ACTIVITIES. THE SERVICES TO BE VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 8 PERFORMED UNDER THIS AGREEMENT SHALL INCLUDE B UT NOT LIMITED TO: - PERSONNEL AND ORGANIZATION ASSISTANCE AND SUPPORT IN CREW MANAGEMENT, PLANNING AND ADMINISTRATIO N FUNCTIONS AND ASSISTANCE IN DEVELOPMENT OF POLICIES IN RESPECT OF HUMAN RESOURCE; OPERATIONS SUPPORT ASSISTANCE IN ENSURING THAT QUALIFYING PROJECTS ARE COMMENCED CORRECTLY THROUGH PROJECT CO - ORDINATION AND COSTLY ERRORS ARE AVOIDED OR LIMITED; ASSISTANCE IN PROJECT EXECUTION AND RELATED ACTIVITIES; QUALITY, HEALTH, SAFETY AND ENVIRONMENT ASSISTANCE IN FORMULATING BUSINESS PROCESSES FOR ORGANIZATIONAL AND PROJECT MATTERS; DESIGNATED PERSONNEL ASHORE DESIGNATING A PERSON ASHORE TO M AINTAIN CONTRACT THE CREW OF THE SHIP AND THE SERVICE RECIPIENT COMPANY; INFORMATION TECHNOLOGY PROV IDING INFORMATION TECHNOLOGY SUPPORT DURING THE PERFORMANCE OF A PROJECT, SUPPORT WITH RESPECT TO HARDWARE AND SOFTWARE AND TRANSFORMATION OF INFORM ATION; ESTIMATING AND ENGINEERING ASSISTANCE IN COST BUDGETING AND ENGINEERING; MARKETING ADVICE AND SUPPORT ON MARKETING EFFORTS, PRODUCT INFORMATION AND SUPPORT IN PUBLIC RELATIONS PROGRAMS, MARKETING OF THE PRODUCT; ADMINISTRATIO N VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 9 ASSISTANCE IN FINANCIAL, ACCOUNTING, AUDITING AND INSURANCE MATTERS; AND LEGAL PROVISION OF ADVICE AND ASSISTANCE IN FISCAL AND LEGAL MATTERS. 2. NATURE AND EXTENT OF SERVICES A) B) ALL SERVICES TO BE RENDERED BY THE SERVICE COMPANY WILL BE ADVISORY AND CONSULTATIVE AND THE SERVICE RECIPIENT COMPANY SHALL HAVE THE FINAL AUTHORITY FOR THE IMPLEMENTATION OF A ADVICE AND ASSISTANCE RECEIVED. FURTHER, IN NO CASE SHALL THE SERVICE COMPANY BE HELD RESPONSIBLE FOR OUTCOME OF THE IMPLEMENTATION E MANATING FROM ANY ADVISE PROVIDED BY THE SERVICE COMPANY. IT WAS ALSO SUBMITTED BY THE ASSESSEE THAT, THE ASSISTANCE TO THE INDIAN COMPANY WAS GIVEN FOR THE FOLLOWING STAGES IN THE DREDGING CONTRACTS NAMELY: - ( I ) PRE - BID STAGE; ( II ) BIDDING STAGE; ( III ) PROJECT OPERA TION/EXECUTION STAGE; ( IV ) POST PROJECT COMPLETION STAGE . IT WAS FURTHER CONTENDED THAT, THE COST OF RENDERING THE SERVICES IS ACCOUNTED BY VODMC AND IS SUBSEQUENTLY ALLOCATED TO VARIOUS GROUP ENTITIES BASED ON THE TURNOVER OF EACH ENTITY VIS - - VIS THE TOTAL TU RNOVER OF VAN OORD G ROUP. IT WAS THUS STATED THAT THE SERVICES FEES ARE CHARGED AS A PERCENTAGE OF TURNOVER CARRIED OUT BY V OIPL DURING THE YEAR WITHOUT ANY MARK UP. VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 10 4. THE LD. ASSESSING OFFICER AFTER ANALYZING THE SERVICE AGREEMENT AND THE SUBMISSION S OF THE ASSESSEE, OBSERVED THAT, THE INDIAN ENTITY / VIOPL IS TOTALLY DEPENDENT UP ON THE FOREIGN ENTERPRISE FOR ITS EXPERIENCE IN I NDUSTRIAL, COMMERCIAL AND SCIENTIFIC FIELD. IN FACT, STARTING FROM THE PRE - BID STAGE THE ASSESSEE COMPANY IS PROVIDING FULL SU PPORT SERVICES TILL THE POST PROJECT COMPLETION STAGE. THE INDIAN COMPANY IS ENGAGED IN A HIGHLY TECHNICAL BUSINESS OF DREDGING ACTIVITIES FOR WHICH IT IS COMPLETELY DEPENDENT ON THE PARENT COMPANY I.E. THE ASSESSEE COMPANY F ROM PRE - BID STAGE TILL THE POST - PROJECT COMPLETION STAGE. THE ASSESSEE COMPANY IS A WORLD LEADER IN THIS BUSINESS OF DREDGING AND RELATED SERVICES AND IS SHARING ITS EXPERIENCE AND INFORMATION WHICH IT HAS DEVELOPED OVER THE DECADES FOR SUCCESSFUL EXECUTION OF THE CONTRACTS AND BUSINESS OF THE INDIAN COMPANY. THE INDIAN COMPANY IS ALSO EN - CASHING ON THE BRAND NAME AND EXPERIENCE OF THE ASSESSEE COMPANY NOT ONLY FOR PROCURING BUSINESS AND FOR ITS SUCCESSFUL IMPLEMENTATION AS WELL. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO FURNISH THE DOCUMENTARY EVIDENCES IN SUPPORT OF THE BUSINESS MANAGEMENT SERVICES , IN RESPONSE TO WHICH T HE ASSESSEE VIDE LETTER DATED 18.11.2011 HAS FURNISHED ALL THE EVIDENCES. ON GOING THROUGH THE SAME HE OBSERVED THAT IT IS PROVIDING USER MANUAL HAVING INSTRUCTIONS ALONG WITH TECHNICAL DESIGN AS TO HOW THE FOLDERS ARE TO BE MAINTAINED REGARDING LOGON INSTRUCTIONS, WORK PLACE SECURITIES , ACCESSING NETWORK D RIVES, HOW TO OPEN AN ARCHIVE ALONG WITH TECHNICAL DESIGNS AND DIAGRAMS , ETC. IT ALSO CONTAINS T HE STANDARD PROCEDURES FOR INSPECTION, CHECKLIST OF MAIN EQUIPMENTS, PROJECT PLAN, SAFETY WALK, SAFETY WORK REPORT, DRAWING SOLUTION ALONG WITH DRAWING HAVE ALSO BEEN GIVEN. THE LITERATURE REGARDING MARINE VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 11 ENGINEERING SOLUTIONS, MAIN EQUIPMENTS AND DREDGING SOLUTIONS HAVE ALSO BEEN GIVEN IN DETAIL ALONG WITH THE TERMS AND DESIGNS. THIS HE INFERRED THAT IT IS NOTHING BUT SHARING OF EXPERIENCE OF INDUSTRIAL, COMMERCIAL AND SCIENTIFIC IN NATURE AND HENCE PAYMENTS RECEIVED BY THE ASSESSEE ARE TO BE T REATED AS ROYALTY UNDER ARTICLE 12(4) OF INDIA - NETHERLAND DTAA. HE FURTHER HELD THAT, ONCE THESE SERVICES ARE TAXABLE AS ROYALTY THEN IT IS NOT REQUIRED WHETHER THE SERVICES HAVE BEEN RENDERED IN INDIA OR NOT. 5. REGARDING SECOND ASPECT OF REIMBURSEM ENT OF SALARY EXPENSES, THE ASSESSING OFFICER NOTED THAT, ASSESSEE COMPANY HAS RECEIVED CERTAIN PAYMENTS ON ACCOUNT OF REIMBURSEMENT OF EXPENSES WHICH WERE MAINLY SALARY INCURRED ON PERSONNEL AND STAFF ON BEHALF OF VOIPL FOR SUMS AGGREGATING TO RS.2,22,39, 146/ - . IN RESPONSE TO THE SHOW CAUSE NOTICE THE ASSESSEE SUBMITTED THAT, THE SALARY PAID BY THE ASSESSEE ON BEHALF V OIPL OUTSIDE INDIA COULD BE BROADLY CLASSIFIED UNDER THE FOLLOWING HEADS: - SALARY TO CREW MEMBERS OF DREDGER VOLVOX DELTA - FOR RS.16,214,187 ; AND SALARY TO CREW MEMBERS OF DREDGER VOLVOX AT L ANTA - FOR RS.6,024,959 . T HEREAFTER, EMPLOYEE - WISE BRE AK - UP OF SALARY ALONG WITH RESPECTIVE DAYS OF STAY IN INDIA FOR THE CREW MEMBERS OF VOLVOX DELTA AND VOLVOX AT L ANTA I N INDIA WAS SUBMITTED. IT WAS CONTENDE D THAT, THE STAY OF THE EMPLOYEE IN ALL THE CASES DID NOT EXCEEDED 90 DAYS AND, THEREFORE, IN VIEW OF THE PROVISION OF SECTION 10(6)(VIII), SUCH SALARIES WOULD NOT BE TAXABLE IN INDIA. THE ASSESSEES SUBMISSIONS IN THIS REGARD HAVE BEEN INCORPORATED IN TH E PAGE 14 OF THE ASSESSMENT VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 12 ORDER. HOWEVER, THE LD. A SSESSING O FFICER REGARDING SERVICES HELD THAT THE SERVICE OF PROVIDING CREW ON DREDGERS IS IN FURTHERANCE TO SHARING INDUSTRIAL, COMMERCIAL AND SCIENTIFIC EXPERIENCE UNDER THE SERVICE AGREEMENT BETWEEN V ODMC AND VOIPL AND HENCE, THE REIMBURSEMENT OF SALARY EXPENSES RECEIVED BY BODMC IS TAXABLE IN INDIA AS FTS UNDER ARTICLE 12(5)(A) OF INDIA - NETHERLANDS DTAA. ACCORDINGLY, HE TAXED THE REIMBURSEMENT OF SALARY OF RS.2,22,39,146/ - AS FEE FOR TECHNICAL SERV ICES . 6. THE AFORESAID OBSERVATIONS AND THE FINDINGS ON BOTH THE ISSUES BY THE ASSESSING OFFICER HAVE BEEN UPHELD BY THE DRP ALSO. 7. BEFORE US THE LD. SENIOR COUNSEL , MR. PORUS KAKA AFTER EXPLAINING THE ENTIRE FACTS SUBMITT ED THAT, THE INDIAN SUBSIDI ARY , V OIPL CAME INTO EXISTENCE IN THE YEAR 1997 AND BEFORE THAT THE ASSESSEE WAS PERFORMING ITS WORK DIRECTLY IN INDIA. THE ASSESSEE IS ONE OF THE LEADING DREDGING COMPANY IN THE WORLD AND WITH AN OBJECTIVE TO ACHIEVE CONSISTENCY OF APPROACH AND ECONOMIES OF SCALE FOR THE VARIOUS GROUP ENTITIES ACROSS THE GLOBE, IT PROVIDES ONGOING ASSISTANCE AND SUPPORT ON CONTINUOUS BASIS IN THE FIELD OF QUALITY, HEALTH & SAFETY, INFORMATION TECHNOLOGY, ESTIMATING AND ENGINEERING, MARKETING, ADMINISTRATION, PERSONNEL ETC. TO ALL ITS GROUP AFFILIATES. ACCORDINGLY, VOIPL, WHICH IS A SUBSIDIARY OF VODMC IN INDIA, HAS ENTERED INTO A SERVICE AGREEMENT DATED 1 , APRIL 2004 WITH VODMC IN RESPECT OF THE SAID SERVICES WHICH HAVE BEEN HIGHLIGHTED ABOVE . VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 13 8. AFTER REFERRING TO THE VA RIOUS CLAUSES GIVEN IN THE SERVICES AGREEMENT , WHICH ARE APPEARING AT PAGE 1 TO 5 OF THE PAPER BOOK, HE SUBMITTED THAT NONE OF THE SERVICES PROVIDED ANY KIND OF USE OF OR RIGHT TO USE OF KNOWHOW TO THE INDIAN COMPANY. IT WAS IN THE NATURE OF STANDARD SE RVICES AND TO ENSURE THAT THERE IS A CONSISTENCY IN THE APPROACH WORLD - WIDE AND IT MEETS THE INTERNATIONAL STANDARDS OF THE ASSESSEE COMPANY. THOUGH UNDER THE AGREEMENT, COMPENSATION WA S BASED ON MARK - UP BUT IN ACTUAL NO MARK - UP HAS BEEN RECEIVED BY THE A SSESSEE NOR HAS BEEN CLAIMED BY THE INDIAN ENTITY, VIOPL. THIS FACT, HE SUBMITTED CAN BE CORROBORATED FROM THE CERTIFICATE OBTAINED FROM THE AUDITORS (EARNEST & YOUNG) WHO HAVE CERTIFIED ON THE BASIS OF ACTUAL VERIFICATION OF DETAILS AND DOCUMENTS THAT ONL Y COST INCURRED BY THE ASSESSEE IN RENDERING TO THE AFORESAID SERVICES HAS BEEN ALLOCATED TO VOIPL AND SAME HAS BEEN RECEIVED BY WAY OF REIMBURSEMENT FROM THE SAID ENTITY. IN SUPPORT, HE HAS REFERRED TO THE AUDITORS REPORT AND CERTIFI CATE GIVEN AT PAGES 9 TO 11 OF THE PAPER - BOOK. BASED ON THESE DOCUMENTS, THE WORKING OF COST ALLOCATION WAS GIVEN IN THE FOLLOWING MANNER: - S NO. PARTICULARS AMOUNT (A) TOTAL GROUP TURNOVER OF BODMC EUR 1,53,60,56,000 (B) TOTAL GENERAL ADMINISTRATIVE EXPENDITURE EUR 10,27,13,000 (C) OVERHEAD PERCENTAGE =(B)/(A) * 100 6.7% (D) TOTAL TURNOVER OF BOIPL FOR FY 2008 - 09 INR 3,28,48,01,955 (E) COST ALLOCATION TO BOIPL = (D) * (C) INR 22,00,81,731 (F) INVOICE RAISED BY VODMC ON VOIPL EUR 32,99,576.18 THEREAFTER, HE DREW OUR ATTENTION TO THE VARIOUS DOCUMENTS PLACED IN THE PAPER BOOK HIGHLIGHTING THE DETAILS AND NATURE OF ACTUAL SERVICE S PROVIDED BY THE ASSESSEE TO V OIPL. THE SAID DETAILS AND NATURE OF SERVICES ARE BEING SUMMARIZED WITH THE HELP O F THE PAPER - BOOK IN THE FOLLOWING MANNER: - VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 14 S. NO. PARTICULARS NAME OF SERVICES REFERENCE 1 INFORMATION TECHNOLOGY CENTRALIZED TEAM REN DERS IT SUPPORT SERVICES TO VOIPL A ND THE GROUP AFFILIATES SUCH AS: . ASSISTING BY PROVIDING: LOGON INSTRUCTIONS; W ORKPLACE SECURITY; ARCHIVING EMAILS; ACCESSING NETWORK DRIVES WORKPLACE RESTORE . ASSISTING IN IT INFRASTRUCTURE ( NETWORK , EMAIL, ETC.) . SOFTWARE MAINTENANCE SERVICES, . TROUBLESHOOTING SERVICES, ETC. . IT USER GUIDELINES (PAGES 12 TO 38 OF THE PAPERBO OK) . SAMPLE CORRESPONDENCE BETWEEN BOIP AND IT SERVICE DESK OF VODMC WHICH DEMONSTRATES THE TROUBLESHOOTING/ SUPPORT SERVICES PROVIDED 2 OPERATIONAL SUPPORT VARIOUS OPERATING CHECKLISTS (FORMATS)ARE PROVIDED BY VODMC WHICH ASSISTS VOIPL IS OPERATIONAL EFFICIENCY . E.G. STANDARD QUALITY, HEALTH AND SAFETY STANDARDS E.G. STANDARD QUALITY, HEALTH AND SAFETY STANDARDS E.G. SAFETY WALK REPORT FOR EQUIPMENT, BOAT, CREW, OFFICES ETC. . CHECKLISTS PROVIDED BY BODMC (PLEASE REFER PAGE 44 TO 66 OF THE PAPER B OOK) 3 MARKETING VODMC PROVIDES MARKETING SUPPORT TO VOIPL IN VARIOUS W AYS VIZ. . E - MARKETING THROUGH ITS WEBSITE WWW.VANOORD.COM , UPDATING AND MAINTAINING THE WEBSITE FOR THE GROUP . PRINTING AND PUBLISHING BROC HURES WHICH COULD BE DISTRIBUTED BY VOIPL TO ITS POTENTIAL CLIENTS . OBTAINING CERTIFICATE OF A PPROVAL FROM LLOYDS REGISTER NETHERLAND BV . BROCHURES (PLEASE REFER PAGE 67 TO 75 OF THE PAPER BOOK) 4 QUALITY, HEALTH, SAFETY AND ENVIRON - ME NT (QH SE) . CONDUCTING AT REGULAR INTERVALS INTERNAL AUDITS TO DETERMINE ADHERENCE TO QHSE PROCEDURES . INCREASING SAFETY AWARENESS WITHIN VAN OORD GROUP . UPDATING HEALTH, SAFETY AND ENVIRONMENT POLICY TO BE FOLLOWED BY THE GROUP. . AUDIT REPORT FOR IN TERNAL AUDIT CONDUCTED (PLEASE REFER PAGE 75 TO 83 OF THE PAPER BOOK) 5 ESTIMATING AND ENGINEERING VODMC PROVIDES NEED BASED SUPPORT /ASSISTANCE TO VOIPL . REPORTS/STUDY ON THE NATURE OF SOIL, NATURE OF THE DREDGER TO BE USED ETC. . ESTIMATING THE C OST FOR THE PROJECT . COPY OF REPORT FROM ESTIMATION AND ENGINEERING DEPARTMENT (PLEASE REFER TO PAGE 84 TO 136 OF THE PAPER BOOK) VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 15 . CARRYING OUT THE RISK ANALYSIS. . ENGINEERING SUPPORT SERVICES A ND TIME TO TIME TECHNICAL ADVICE IN RELATION TO THE PROJECTS CARRIED OUT 6 PERSONNEL A ND ORGAN - ISATION ADMINIS - TRATION AND LEGAL . VODMC ASSISTS IN PROVIDING PRE - BID, PERFORMANCE AND OTHER GUARANTEES TO THE CLIENTS OF VOIPL WHICH ASSISTS BOIPL IN OBTAINING CONTRACTS. . ASSISTANCE FOR FINALIZING THE TERMS OF THE CONTRACT TO ENSURE THAT VOIPL . LEGAL SUPPORT FOR BID SUBMISSION LETTER TO BE SUBMITTED BY VOIPL (PLEASE REFER PAGE 137 TO 146 OF THE PAPER BOOK) FROM THESE DOCUMENTS AND THE NATURE OF SERVICES, HE SUBMITTED THAT THERE IS NO PROVIDING OF A NY KNOWHOW OR INFORMATION CONCERNING THE INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. NONE OF THE SERVICES OR ACTIVITIES FALLS WITHIN THE AMBIT OF ROYALTY AS DEFINED IN PARA 4 OF ARTICLE 12 OF THE DTAA. IN SUPPORT OF HIS CONTENTION THAT IMPARTING OF KNOWHOW IS A PREREQUISITE CONDITION FOR TREATING ANY INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE AS ROYALTY, HE RELIED UPON THE OECD COMMENTARY AND SPECIFICALLY DREW OUR ATTENTION TO PARA 11. HE SUBMITTED THAT P ROVIDING OF KNOW HOW TO THE RECIPIENT MEANS THAT THE PERSON SHOULD BE ABLE TO MAKE USE OF INFORMATION INDEPENDENTLY ON ITS OWN ACCOUNT WITHOUT RECOURSE TO THE PROVIDER IN FUTURE. IN OTHER WORDS, THE RECIPIENT WOULD BE ENABLED TO UTILIZE THE KNOWHOW FOR HIS OWN PURPOSE WITH OUT TAKING ANY ASSISTANCE FROM THE PROVIDER. IN CASE OF THE ASSESSEE, CONTINUOUS SERVICES WHICH HAVE BEEN PROVIDED TO VIOPL DO NOT FALL IN ANY MANNER IN THE REALM OF PROVIDING OF ANY KIND OF KNOWHOW BUT ARE PURELY IN THE NATURE OF SERVICES. THEREAFTER, WITH RESPECT TO EACH AND EVERY SERVICE PROVIDED BY THE ASSESSEE HE HIGHLIGHTED THE NATURE OF SERVICES AND FUNCTIONS PROVIDED AND CONTENDED THAT NONE OF THESE SERVICES LEAD S TO IMPART ING OF ANY KNOWLEDGE, SKILL OR VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 16 EXPERIENCE BY WAY OF INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE WHICH CAN BE SAID TO BE MADE AVAILABLE TO VOIPL. IN HIS BRIEF FOLLOWING ASPECTS HAVE BEEN HIGHLIGHTED BY HIM QUA THE SERVICES PROVIDED BY THE ASSESSEE: - A ) INFORMATION TECHNOLOGY : T HE SERVICES ARE PROVIDED FOR THE USE OF GROUP COMPANIES COMPUTER SYSTEMS. IT TEAMS PREPARED THE MANUAL PROVIDING INFORMATION AND NOT SECRET INFORMATION, WHICH IS AVAILABLE OVER THE INTERNET. THE INFORMATION PROVIDED IS ON THE METHOD OF USING THE COMPUTER SYSTEM AND NOT ON THE METHOD O F DESIGN OR CREATE A COMPUTER SYSTEM . THE RECOURSE OF THE HELPDESK/TROUBLESHOOTING SERVICES FOR CERTAIN ISSUES ARE REQUIRED ON REGULAR BASIS. THE APPELLANT - ASSESSEE CAN PROVIDE KNOWHOW ONLY WHEN THE RECEIPT IS ABLE TO REPLICATE OR CREATE THE COMP UTER SYSTE M BY ITSELF. WITH CHAN GING TECHNOLOGY THESE INFORMATION IS REQUIRED TO BE UPDATED FROM TIME TO TIME ON REGULAR BASIS. NO KNOWLEDGE, SKILL OR EXPERIENCE BY WAY OF INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC IS MADE AVAILABLE TO VOIPL. THESE FAQS ; HOW TO LOGIN TO THE SYSTEM, CHARGE THE PASSWORD ETC CAN NEVER AMOUNT TO TRANSFER OF KNOWHOW. B ) OPERATIONAL SUPPORT : THE VAN OORD AS A GROUP OPERATES AT A HIGH STANDARD OF SAFETY, WHERE EVER IT MAY OPERATE. VODMC PROVIDES WITH THE CHECKLIST (FORMAT) F OR PROJECT PLANS, SAFELY WORK AND INSPECTION PLANS. THE INFORMATION IN THE CHECKLIST IS COMPLETED IN INDIA, BY A SENIOR PERSON WORKING ON PROJECT IN INDIA. IT IS NOT PREPARED/COMPANIED BY VODMC. VIOIPL VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 17 HAS TO APPLY ITS OWN MIND WHILE FILING UP THE INFORMAT ION AND NO INFORMATION HAS BEEN PASSED BY THE VODMC. THESE CHECKLIST S REQUIRED TO BE CONTINUALLY UPDATED FORM TIME TO TIME ON REGULAR BASIS. NO KNOWLEDGE, SKILL OR EXPERIENCE BY WAY OF INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC IS MADE AVA ILABLE TO VOIPL TO CREATE OR UPDATE THE CHECKLIST THEMSELVES. THERE IS NO KNOWHOW THAT IS TRANSFERRED TO VOIPL. C ) MARKETING : THE VOIPL FOR MARKETING SUPPORT IS PROVIDED WITH PRINTED / PUBLISHED BROCHURES WHICH CAN BE DISTRIBUTED TO ITS POTENTIAL CLIENTS. V ODMC UPDATE S AND MAINTAINS THE WEBSITE OF THE GROUP AS VOIPL DOES NOT HAVE ITS OWN WEBSITE. IT ALSO HELPS VOIPL TO OBTAIN CERTIFICATE OF APPROVAL (ISO CERTIFICATES) FROM THE CONCERNED ORGANIZATION VIZ. LLOYDS REGISTER NETHERLAND BV . THESE SERVICES HELP VOI PL IN OBTAINING CONTRACTS ON REGULAR BASIS AND HENCE NEED TO BE PERFORMED REGULARLY. NO KNOWLEDGE, SKILL OR EXPERIENCE BY WAY OF INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC IS MADE AVAILABLE TO VOIPL NOT IS ANY KNOWHOW TRANSFERRED. THESE AR E PURE SUPPORT SERVICES. D ) QUALITY, HEALTH, SAFETY AND ENVIRONMENT (QHSE) : THE ASSESSEE CONDUCTS INTERNAL AUDITS ON REGULAR INTERVALS TO DETERMINE THE ADHERENCE TO QHSE PROCEDURES. THERE IS NO KNOWLEDGE OR KNOWHOW TRANSFERRED TO VOIPL AT ANY STAGE; THESE AUDIT S ARE DONE ON REGULAR BASIS. THESE SERVICES ARE REQUIRED TO BE CARRIED PER DREDGER OR SITE. VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 18 E ) ESTIMATE AND ENGINEERING : VODMC ASSISTS VOIPL DURING THE TENDERING PROCESS WITH REGARD TO PREPARING ESTIMATES AND BIDS. BASED ON A TEMPLATE RECEIVED FROM NETH ERLANDS, THE EMPLOYEE OF V OIPL WILL PREPARE THE ESTIMATE. THIS IS DONE INDIVIDUALLY AND SEPARATELY FOR EACH TENDER/ BID. AT THE TENDERING STAGE, SOIL DATA IS SENT BY VOIPL TO VODMC AND A TESTING REPORT IS DONE WHICH AGAIN ASSISTS IN DETERMINING THE ESTIMAT E FOR THE DREDGING TIME AND HENCE, THE BID. NO KNOWHOW IS TRANSFERRED BY VODMC TO VOIPL AT ANY STAGE AND THE SOIL REPORT IS PREPARED INDIVIDUALLY FOR EACH SITE. IT DOES NOT ALSO TRANSFER ANY KNOW HOW SINCE VOIPL CANNOT REPLICATE/REDO THE SAME IN ITS OWN BU SINESS AT ANY STAGE. F ) PERSONAL AND ORGANIZATION, ADMINISTRATION AND LEGAL : THE ASSESSEE ASSISTS IN FINALIZING THE BID SUBMISSIONS ON LEGAL, PERFORMANCE AND OTHER GUARANTEES TO THE CLIENT OF VOIPL. THE APPELLANT - ASSESSEE HAS TO CARRY OUT THESE SERVICES FOR EACH TENDER, PER DREDGER OR SITE. NO KNOWLEDGE, SKILL OR EXPERIENCE BY WAY OF INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC IS PASSED OVER TO VOIPL. HIGH LIGHTING T HE AFORESAID SERVICES PROVIDED BY VODMC , MR. KAKA SUBMITTED THAT THESE ARE P URELY TO ACHIEVE CONSISTENCY OF APPROACH AMONGST THE GROUP ENTITIES AND ECONOMIES OF SCALE. VODMC AND VOIPL BEING IN THE DREDGING INDUSTRY NEED TO HAVE A HIGH LEVEL OF SAFETY WHERE EVER IT MAY OPERATE. THE INFORMATION PROVIDED BY VODMC IS GENERAL INFORMATI ON AND NOT ANY KIND OF SECRET INFORMATION, WHICH COULD BE OBTAINED VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 19 OVER THE INTERNET. THESE SERVICES ARE PROVIDED ON CONTINUOUS BASIS AND CONSTANTLY UPDATED FROM TIME TO TIME. THESE ARE PURE SERVICES WITHOUT ANY TRANSFER OF KNOWLEDGE, SKILL AND EXPERIENCE CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC IS MADE AVAILABLE TO VOIPL. 9. MR. KAKA, SUMMARIZ ING HIS CONTENTENTION SUBMITTED THAT, ASSESSEE WHILE RENDERING BUSINESS SUPPORT SERVICES TO VOIPL IS NOT MAKING AVAILABLE ANY KIND OF KNOWHOW T O THE I NDIAN ENTITY AND HENCE PAYMENT MADE BY VOIPL TO THE ASSESSEE CANNOT BE RECKONED AS ROYALTY. IN SUPPORT OF HIS CONTENTION, HE RELIED UPON THE FOLLOWING DECISIONS: - SR. NO CASE LAW CITATION 1 GECF ASIA LIMITED V DDIT 65 SOT 257 2 DIAMOND SERVICES INTERNA TIONAL (P) LTD V S . UNION OF INDIA [2008] 304 ITR 201 3 DDIT V PREROY AG [2010] 39 SOT 187 (MUMBAI ITAT) 4 SPICE TELECOM V ITO [2008] 113 TTJ 502 (BANGALORE ITAT) 10 . ANOTHER LIMB OF HIS ARGUMENT ON THIS ASPECT WAS THAT, THE SERVICE FEES WHICH HA S BEEN RECEIVED BY THE ASSESSEE FOR RENDERING OF AFORESAID SERVICES ARE WITHOUT ANY MARKUP AND CONSTITUTES PURE ALLOCATION OF COST, WHICH CANNOT BE HELD TO BE TAXABLE UNDER THE ACT. FOR RENDERING OF AFORESAID SERVICES VODMC HAS CHARGED A SPECIFIED PERCENTA GE OF COST INCURRED BY IT FOR RENDERING THE SERVICES TO VOIPL, THE SAID SERVICES IS ALLOCATED AT THE COST OF RENDERING THE SAID SERVICES WHICH IS ALLOCATING BY VODMC AND IS PROPORTIONATELY ALLOCATED TO VARIOUS GROUP ENTITIES BASED ON THE TURNOVER OF EACH E NTITY VIS - - VIS THE TOTAL TURNOVER OF VAN OORD GROUP. THUS, THE SERVICES ARE CHARGED AS A PERCENTAGE OF TURNOVERS CARRIED OUT VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 20 BY VOIPL DURING THE YEAR. WITH REGARD TO THE AFORESAID FACT, H E POINTED OUT THAT THE SAME IS CORROBORATED FROM THE CERTIFICATE REC EIVED FROM THE AUDITORS OF VODMC WHICH STATES THAT BASED ON THE VERIFICATION OF VARIOUS DETAILS AND DOCUMENTS, IT IS OBSERVED THAT THE COST INCURRED BY ASSESSEE IN RENDERING THE AFORESAID SERVICES HAS BEEN ALLOCATED TO VOIPL. IN SUPPORT HE RELIED UPON THE DECISION OF ITAT C BENCH , MUMBAI IN THE CASE OF CAIRN ENERGY INDIA PTY LTD V ACIT, REPORTED IN [2009] 126 TTJ 226 AND CATENA OF OTHER DECISIONS, THE LIST OF WHICH ARE AS UNDER: CIT V SIEMENS AKTIONGESELSCHAFT [2009] 310 ITR 320 (BOM HIGH COURT) DIT V A P MOLLER MAERSK AS [2015] 374 ITR 497 (BOM HIGH COURT) CIT V EXPEDITORS INTERNATIONAL(INDIA) (P) LTD.[2012] 209 TAXMAN 18 (DELHI HIGH COURT) CIT V INDUSTRIAL ENGINEERING P RODUCTS PVT LTD [1993] 202 ITR 1014 (DELHI HIGH COURT) CIT V DUNLOP RUBBER CO LTD [1983] 142 ITR 493 (CALCUTTA HIGH COURT) 1 1 . AS REGARDS T HE ISSUE AND ADDITION MADE ON AC COUNT OF REIMBURSEMENT OF SALARY RECEIVED BY VODMC FROM VOIPL BY TREATING IT AS FTS UNDER ARTICLE 12(5), MR. PORUS KAKA SUBMITTED THAT, FIRST OF ALL THE SAID RECEIPTS ARE NOT TAXABLE UNDER SECTION 10(6)(VIII) BECAUSE THESE ARE PURELY SALARY INCOME EARNED BY AN EMPLOYEE WHO IS A NON - RESIDENT EM PLOYEE OF A FOREIGN SHIPPING COMPANY AND THE STAY OF NONE OF THE EMPLOYEES HAVE ADMITTEDLY EXCEEDED 90 DAYS. HE SUBMITTED THAT, THE CREW MEMBERS WERE NON - RESIDENTS AND WORKING ON FOREIGN SHIPS I.E. THE DREDGERS VOLVO X ATLANTA AND VOLVOX DELTA AND THEIR STAY IN INDIA DID NOT EXCEED 90 DAYS. THE SAME HE POINTED OUT THAT COULD BE VERIFIED FROM THE BREAK - UP OF THE NUMBER OF DAYS THE CREW DEPUTED ON DREDGER VOLVOX ATLANTA STAYED IN INDIA AND MINIMUM TRAINING REQUIREMENT CO MPLIANCE CERTIFICATE ISSUED BY THE DIRECTOR VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 21 GENERAL SHIPPING DATED 10 SEPTEMBER, 2009 THE COPY OF WHICH HAS BEEN ENCLOSED AS PAGE 149 OF THE PAPER BOOK. IN THE LIGHT OF THE ABOVE, HE SUBMITTED THAT THE CREW MEMBERS SOURCED FROM VODMC, SATISFIED ALL THE CON DITIONS PRESCRIBED UNDER THE PROVISIONS OF SECTION 10( 6 )(VIII) OF THE ACT AND THEREFORE, T HE SALARY INCOME RECEIVED BY THE CREW MEMBERS WAS NOT TAXABLE IN INDIA. FURTHER, VODMC HAS NOT CHARGED ANY MARK UP ON SUCH SALARY PAYMENTS. ACCORDINGLY, VOIPL HAS MAD E REIMBURSEMENT OF THE SALARY PAID TO VODMC TO THE CREW MEMBERS OF THE DREDGER, WHICH BY ITSELF NOT TAXABLE IN INDIA UNDER THE PROVISIONS OF SECTION 10(6)(VIII) OF THE ACT. IN THE LIGHT OF THE AFORESAID FACTS, HE SUBMITTED THAT THE REIMBURSEMENT WAS ON ACC OUNT OF SALARY OF CREW MEMBERS PROVIDED ON THE DREDGERS BY VODMC. FURTHER, THE PROVISION OF CREW ON DREDGERS HAS NO CONNECTION OR IS NOT ANCILLARY OR SUBSIDIARY TO THE PROVISION OF SERVICES PURSUANT TO THE SERVICE AGREEMENT ENTERED BETWEEN VODMC AND VOIPL. IN ANY CASE, HE SUBMITTED THAT, BEING REIMBURSEMENT OF EXPENSES THE SAME CANNOT BE TREATED AS INCOME OF THE ASSESSEE AND IN SUPPORT, HE RELIED UPON THE SAME SET OF DECISIONS WHICH HAVE BEEN ENLISTED ABOVE. 1 2 . ON THE OTHER HAND, LD. DR STRONGLY REL YING UPON THE ORDER OF THE ASSESSING OFFICER AND DRP SUBMITTED THAT ITAT BENCH IN THE CASE OF ASSESSEE IN VA N OORD ACZ MARINE CONTRACTORS BV VS . ADIT , REPORTED IN [2012] 52 SOT 423 HAS REJECTED THE SIMILAR CONTENTION OF THE ASSESSEE AND SUBMITTED THAT, THE FE ES RECEIVED FROM INDIAN ENTITY FOR PROVIDING COORDINATING AND FACILITATING THE SERVICES IS IN THE FORM OF REIMBURSEMENT OF EXPENSES AND THEREFORE NOT TAXABLE, HELD THAT, IT IS IN THE NATURE OF FEE FOR TECHNICAL SERVICES . THUS THE VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 22 SAID DECISION OF THE ITA T CHENNAI BENCH SHOULD BE FOLLOWED AS THE LD. DRP HAS STRONGLY RELIED UPON THE SAID DECISION. THE RELEVANT OBSERV AT I O N AND FINDING OF THE TRIBUNAL, AS INCORPORATED IN THE DRPS ORDER IS REPRODUCED HEREUNDER: - WE FIND GREAT FORCE IN THE ARGUMENT OF THE RE VENUE AND THE CONCLUSIONS ARRIVED AT BY THE ASSESSING OFFICER AS WELL AS THE DRP. THE FINDING OF THE ASSESSING OFFICER HAS TO BE CONSIDERED NOT IN THE LIGHT OF THE CONTRACT ASSIGNMENT AGREEMENT, BUT ALSO IN THE LIGHT OF THE COST ALLOCATION AGREEMENT ENTERE D INTO BETWEEN THE ASSESSEE COMPANY AND TO ITS SUBSIDIARY HAS UNEQUIVOCALLY DECLARED THAT THE INDIAN COMPANY DOES NOT HAVE ANY SORT OF TECHNICAL EXPERTISE OR RESOURCES AND ABILITY TO CARRY OUT THE DREDGING CONTRACT ASSIGNED TO IT. IT IS IN THE LIGHT OF THE ABOVE DECLARATION THAT THE ASSESSEE COMPANY HAS UNDERTAKEN TO PROVIDE ALL SORTS OF SERVICES TO ITS INDIAN SUBSIDIARY, WHEREVER NECESSARY, TO EXECUTE THE DREDGING CONTRACT. SUCH SERVICES INCLUDE NOT ONLY ARRANGING THE DREDGERS FROM ABROAD, BUT ALSO APPLICA TION OF TECHNICAL MIND TO SELECT AND CHOOSE APPROPRIATE PARTIES TO EXECUTE THE WORK ENTRUSTED TO ITS INDIAN SUBSIDIARY. THE ARGUMENT OF THE ASSESSEE COMPANY THAT THE PAYMENTS WERE MADE BY THE INDIAN SUBSIDIARY ONLY AS REIMBURSEMENT OF EXPENSES CANNOT BE AC CEPTED AT ITS FACE VALUE. THE FACILITIES ARRANGED AND COORDINATED OR OBTAINED BY THE ASSESSEE TO SUPPORT THE OPERATIONS OF ITS INDIAN SUBSIDIARY. THE ARGUMENT OF THE ASSESSEE COMPANY THAT THE PAYMENTS WERE MADE TO ITS INDIAN SUBSIDIARY ONLY AS REIMBURSEMEN T OF EXPENSES CANNOT BE ACCEPTED AT ITS FACE VALUE. THE FACILITIES ARRANGED AND COORDINATED OR OBTAINED BY THE ASSESSEE TO SUPPORT THE OPERATIONS OF ITS INDIAN SUBSIDIARY ARE NOT LAYMANS ACTIVITIES. EVEN TO CHOOSE THE BEST DREDGER, IT IS NECESSARY TO HAVE ADEQUATE TECHNICAL KNOWHOW ABOUT THE NATURE AND PLACE OF WORK TO BE CARRIED OUT BY ITS INDIAN SUBSIDIARY. IT IS NOT POSSIBLE TO SIMPLY SAY THAT THE ASSESSEE HAD ONLY BROUGHT DREDGERS FROM OUTSIDE INDIA TO THE INDIAN PORT FOR DREDGING AND KEPT BACK ONCE TH E WORK IS OVER. THESE ARE OVER - SIMPLIFIED STATEMENTS. APART FROM ARGUING THAT THE PAYMENTS WERE IN THE NATURE OF REIMBURSEMENT OF EXPENSES, THE ASSESSEE HAS NOT EXPLAINED VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 23 ANYTHING ABOUT THE PRICING OF THE SERVICES, FOR WHICH THE SO - CALLED REIMBURSEMENTS WE RE MADE BY THE INDIAN SUBSIDIARY TO THE ASSESSEE COMPANY. IT IS THE CASE OF THE ASSESSEE THAT EXPENSES WERE REIMBURSED BY THE INDIAN SUBSIDIARY AT PAR WITH THE INVOICES ISSUED BY THIRD PARTIES. BUT THERE IS NOTHING ON RECORD TO SHOW THAT THE PRICE NEGOTIAT ED BETWEEN THE ASSESSEE AND THE THIRD PARTIES AND THE AMOUNTS REFLECTED IN THE INVOICES ISSUED BY THE THIRD PARTIES ARE PRICES COMPARABLE TO SIMILAR SERVICES PROVIDED BY INTERNATIONAL PARTIES. THE ASSESSEE HAS NOT ESTABLISHED THAT IT HAD OFFERED SERVICES T O THE SUBSIDIARY COMPANY ON COST TO COST BASIS AT BEST REASONABLE AND COMPETENT PRICES AVAILABLE AT THAT POINT OF TIME. THEREFORE, IT IS NOT PROPER TO RULE OUT AN ELEMENT OF PROFIT IN THE INVOICES RAISED BY THIRD PARTIES THEMSELVES, EVEN THOUGH WHAT WAS PA ID BY THE SUBSIDIARY COMPANY TO THE ASSESSEE IS THE SAME AMOUNT AS REFLECTED IN THE INVOI C ES. TH EREFORE, THE ARGUMENT THAT WHAT HAS BEEN PAID BY THE SUBSIDIARY TO THE ASSESSEE COMPANY WAS ONLY THE AMOUNT REFLECTED IN THE INVOICES ISSUED BY THE THIRD PARTIE S ALONE, DOES NOT GO TO SUPPORT THE ARGUMENT OF THE ASSESSEE COMPANY THAT THE PAYMENTS WERE ONLY REIMBURSEMENT OF EXPENDITURE AND THERE WAS NO ELEMENT OF PROFIT IN THOSE AMOUNTS. AS THE ASSESSEE HAS NOT EXPLAINED THE PRICING FACTOR WITH REFERENCE TO THE SE RVICES REFLECTED IN THE INVOICES ISSUED BY THE THIRD PARTIES, IT IS NOT POSSIBLE TO SAY THAT THE ASSESSEE HAD NOT RENDERED ANY SERVICE TO ITS INDIAN SUBSIDIARY IN INDIA. FURTHER, IT IS TO BE SEEN THAT THE ORIGINAL CONTRACT WAS AWARDED TO THE ASSESSEE COMPA NY ITSELF. THE CONTACT WAS THEREAFTER ASSIGNED TO ITS SUBSIDIARY ON THE BASIS OF AN ASSIGNMENT AGREEMENT. IT IS CLEAR FROM THE ORDER OF THE ASSESSING OFFICER THAT THE SUBSIDIARY COMPANY DOES NOT HAVE THE TECHNICAL, ORGANIZATIONAL AND MANAGERIAL COMPETENCE TO CARRY OUT THE CONTRACT WORK BY ITSELF. THEREFORE, IN FACT, THE ASSESSEE COMPANY ITSELF HAD, TO A GREAT EXTENT, EXECUTE THE CONTRACT WORK FOR AND ON BEHALF OF ITS SUBSIDIARY. THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, IT IS AN INEVITABLE CONC LUSION ON THE PART OF THE ASSESSING OFFICER THAT THE ASSESSEE HAD RENDERED TECHNICAL SERVICES TO ITS SUBSIDIARY IN INDIA AND THE PAYMENTS WERE IN THE NATURE OF FEE FOR TECHNICAL SERVICES. THEREFORE, WE HOLD THAT THE ASSESSING OFFICER IS JUSTIFIED IN BRINGI NG VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 24 THE SUM OF RS.11,53,52,883/ - TO TAX IN THE HANDS OF THE ASSESSEE COMPANY. THE ISSUE OF FEE FOR TECHNICAL SERVICES IS ALSO DECIDED AGAINST THE ASSESSEE. 1 3 . IN THE REJOINDER BEFORE US, THE LD. SENIOR COUNSEL MR. PORUS KAKA SUBMITTED THAT THE SAID DECISION IS NOT APPLICABLE ON THE FACTS OF THE PRESENT CASE FOR THE VARIOUS REASONS, WHICH CAN BE SUMMARIZED AS UNDER: - (A) IN THE CASE OF VAN OORD ACZ, THE MAIN CONTRACT WAS AWARDED TO THE FOREIGN COMPANY WHICH WAS SUB - CONTRACTED TO THE INDIAN SUBSIDIARY ; (B) THE ASSESSEE DID NOT EXPLAIN ANYTHING ABOUT THE PRICING OF THE SERVICES FOR WHICH THE REIMBURSEMENTS WERE MADE; (C) THE ASSESSEE DID NOT ESTABLISH THAT IT HAD OFFERED SERVICES TO THE INDIAN SUBSIDIARY ON COST TO COST BASIS; (E) THE FEES IN THE SAID WERE HELD TO BE IN THE NATURE OF FEES FOR TECHNICAL AND NOT ROYALTY. 1 4 . WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS AS WELL AS MATERIAL REFERRED AND RELIED UPON BEFORE US. THE FIRST ISSUE FOR OUR ADJUDI CATION IS, WHETHER THE FEES RECEIVED BY THE ASSESSEE FROM ITS INDIAN ENTITY , VIOPL FOR MANAGEMENT AND SUPPORT SERVICES IS TO BE TREATED AS ROYALTY UNDER ARTICLE 12(4 ) OF INDIA - NETHERLAND - DTAA OR NOT . THE ENTIRE GAMUT OF FACTS AND NATURE OF SERVICES PROVI DED BY THE ASSESSEE TO VOIPL IN THE TERMS OF SERVICE AGREEMENT DATED 1 ST APRIL, 2004 HAS ALREADY BEEN DISCUSSED ABOVE ELABORATELY . THE REVENUES CASE IS THAT , THE VOIPL IS COMPLETELY DEPENDENT ON ASSESSEE (VODMC) FOR ITS EXPERIENCE IN INDUSTRIAL, COMMERCIA L AND SCIENTIFIC FIELD. VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 25 THE INDIAN ENTITY IS ENGAGED IN HIGHLY TECHNICAL BUSINESS OF DREDGING ACTIVITIES FOR WHICH IT REQUIRES THE INFORMATION AND EXPERIENCE OF THE VODMC RIGHT FROM THE PRE - BIDDING STAGE TILL THE POST PROJECT COMPLETION STAGE. THUS, THE PA YMENT RECEIVED BY THE ASSESSEE - FIRM FOR RENDERING SUCH KIND OF SERVICES FALLS WITHIN THE REALM AND AMBIT OF ROYALTY AS DEFINED IN PARA (4) OF ARTICLE 12 OF THE DTAA. THE RELEVANT DEFINITION OF ROYALTY AS GIVEN IN ARTICLE 12(4) OF INDIA - NETHERLANDS - DTAA READS AS UNDER: - THE TERM ROYALTIES AS USED IN THIS ARTICLE MEANS PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERATION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPH FILMS, ANY PATENT, TR ADE MARK DESIGN OR MODEL, PAN SECRET FORMULA OR PROCESS, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE. HERE, THE MAIN EMPHASIS OF THE REVENUE IS ON THE TERM FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFI C EXPERIENCE . THIS TERM MAINLY ALLUDES TO CONCEPT OF USE OF OR RIGHT TO USE OF PROVIDING OF KNOWHOW , WHERE ONE PARTY AGREES TO IMPART THE INFORMATION ON KNOWHOW CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE TO THE OTHER. OECD IN ITS COMMENT ARY HAS EXPLAINED THESE TERMS IN PARA 11 IN THE FOLLOWING MANNER: - THE CLASSIFYING AS ROYALTIES PAYMENTS RECEIVED AS CONSIDERATION FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE, PARAGRAPH 2 IS REFERRING TO THE CONCEPT OF KNOW - HOW. VARIOUS SPECIALIZED BODIES AND AUTHORS HAVE FORMULATED DEFINITIONS OF KNOW - HOW. THE WORDS PAYMENTS FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE ARE USED IN THE CONTEXT OF THE TRANSFER OF CERTAIN INFORMATION THAT HAS NOT BEEN VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 26 PATENTED AND DOES NOT GENERALLY FALL WITHIN OTHER CATEGORIES OF INTELLECTUAL PROPERTY RIGHTS. IT GENERALLY CORRESPONDS TO UN - DIVULGED INFORMATION OF AN INDUSTRIAL, COMMERCIAL OR SCIENTIFIC NATURE ARISING FROM PREVIOUS EXPERIENCE, WHICH HAS PRACTI CAL APPLICATION IN THE OPERATION OF AN ENTERPRISE AND FORM THE DISCLOSURE OF WHICH AN ECONOMIC BENEFIT CAN BE DERIVED. SINCE THE DEFINITION RELATES TO INFORMATION CONCERNING PREVIOUS EXPERIENCE, THE ARTICLE DOES NOT APPLY TO PAYMENTS FOR NEW INFORMATION OB TAINED AS RESULT OF PERFORMING SERVI CES AT THE REQUEST OF THE PAYER; IN THE KNOW - HOW CONTRACT, ONE OF THE PARTIES AGREES TO IMPART TO THE OTHER, SO THAT HE CAN USE THEM FOR HIS OWN ACCOUNT, HIS SPECIAL KNOWLEDGE AND EXPERIENCE WHICH REMAIN UNREVEALED TO TH E PUBLIC. IT IS RECOGNIZED THAT THE GRANTOR IS NOT REQUIRED TO PLAY ANY PART HIMSELF IN THE APPLICATION OF THE FORMULAS GRANTED TO THE LICENSEE AND THAT HE DOES NOT GUARANTEE THE RESULT THEREOF. THIS TYPE OF CONTRACT THUS DIFFERS FROM CONTRACTS FOR THE PRO VISION OF SERVICES, IN WHICH ONE OF THE PARTIES UNDERTAKES TO USE THE CUSTOMARY SKILLS OF HIS CALLING TO EXECUTE WORK HIMSELF FOR THE OTHER PARTY. PAYMENTS MADE UNDER THE LATTER CONTRACTS GENERALLY FALL UNDER ARTICLE 7. THE NE ED TO DISTINGUISH THESE TWO TY PES OF PAYMENTS, I.E. PAYMENTS FOR THE SUPPLY OF KNOW - HOW AND PAYMENTS FOR THE PROVISION OF SERVICES, SOMETIMES GIVES RISE TO PRACTICAL DIFFICULTIES. THE FOLLOWING CRITERIA ARE RELEVANT FOR THE PURPOSE OF MAKING THAT DISTINCTION: - CONTRACTS FOR THE SUPPLY O F KNOW - HOW CONCERN INFORMATION OF THE KIND DESCRIBED IN PARAGRAPH 11 THAT ALREADY EXISTS OR CONCERN THE SUPPLY OF THAT TYPE OF INFORMATION AFTER ITS DEVELOPMENT OR CREATION AND INCLUDE SPECIFIC PROVISIONS CONCERNING THE CONFIDENTIALITY OF THAT INFORMATION. - IN THE CASE OF CONTRACTS FOR THE PROVISION OF SERVICES, THE SUPPLIER UNDERTAKES TO PERFORM SERVICES WHICH MAY REQUIRE THE U SE, BY THAT SUPPLIER, OF SPECIAL KNOWLEDGE, SKILL AND EXPERTISE BUT NOT THE TRANSFER OF SUCH SPECIAL KNOWLEDGE, SKILL OR EXPERTISE TO THE OTHER PARTY. - IN MOST CASES INVOLVING THE SUPPLY OF KNOW - HOW, THERE WOULD GENERALLY BE VERY LITTLE MORE WHICH NEEDS TO BE DONE BY THE SUPPLIER UNDER THE CONTRACT OTHER THAN TO SUPPLY EXISTING INFORMATION OR VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 27 REPRODUCE EXISTING MATERIAL. ON THE OTHER H AND, A CONTRACT FOR THE PERFORMANCE OF SERVICES WOULD, IN THE MAJORITY OF CASES, INVOLVE CONTRACTUAL OBLIGATIONS. FOR INSTANCE, THE SUPPLIER, DEPENDING ON THE NATURE OF THE SERVICES TO BE RENDERED, MAY HAVE TO INCUR SALARIES AND WAGES FOR EMPLOYEES ENGAGED IN RESEARCHING, DESIGNING, TESTING, DRAWING AND OTHER ASSOCIATED ACTIVITIES OR PAYMENTS TO SUB - CONTRACTORS FOR THE PERFORMANCE OF SIMILAR SERVICES. EXAMPLES OF PAYMENTS WHICH SHOULD THEREFORE NOT BE CONSIDERED TO BE RECEIVED AS CONSIDERATION FOR THE PROVI SION OF KNOW - HOW BUT, RATHER, FOR THE PROVISION OF SERVICES, INCLUDE: - PAYMENTS OBTAINED AS CONSIDERATION FOR AFTER - SALES SERVICE; - PAYMENTS FOR SERVICES RENDERED BY A SELLER TO THE PURCHASER UNDER A WARRANTY; - PAYMENTS FOR PURE TECHNICAL ASSISTANCE; - PAYMENTS FOR A LIST OF POTENTIAL CUSTOMERS, WHEN SUCH A LIST IS DEVELOPED SPECIFICALLY FOR THE PAYER OUT OF GENERALLY AVAILABLE INFORMATION (A) PAYMENT FOR THE CONFIDENTIAL LIST OF CUSTOMERS TO WHICH THE PAYEE HAS PROVIDED A PARTICULAR PRODUCT OR SERVICE WOULD, HO WEVER, CONSTITUTE A PAYMENT FOR KNOW - HOW AS IT WOULD RELATE TO THE COMMERCIAL EXPERIENCE OF THE PAYEE IN DEALING WITH THESE CUSTOMERS), - PAYMENTS FOR AN OPINION GIVEN BY AN ENGINEER, AN ADVOCATE OR AN ACCOUNTANT, AND - PAYMENTS FOR ADVICE PROVIDED ELECTRONICA LLY, FOR ELECTRONIC COMMUNICATIONS WITH TECHNICIANS OR FOR ACCESSING, THROUGH COMPUTER NETWORKS, A TROUBLE - SHOOTING DATABASE SUCH AS A DATABASE THAT PROVIDES USERS OF SOFTWARE NON=CONFIDENTIAL INFORMATION IN RESPONSE TO FREQUENTLY ASKED QUESTIONS OR COMMON PROBLEMS ARISE FREQUENTLY. FROM THE ABOVE CLARIFICATION , I T CAN BE OSTENSIBLY INFERRED THAT , TO QUALIFY AS PAYMENT TOWARDS INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE, PERSON MUST PROVIDE KNOWHOW TO THE RECIPIENT, THAT IS , A S TRONG EMPHASIS HAS BEEN GIVEN TO CONCEPT OF KNOWHOW. THERE IS AN ELEMENT OF IMPARTING OF KNOWHOW TO THE OTHER SO THAT OTHER CAN USE OR VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 28 HAS RIGHT TO USE SUCH KNOWHOW. IN CASE OF INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE , IF SERVICES ARE BEING REND ERED SIMPLY AS AN ADVISORY OR CONSULTANCY THEN IT CANNOT BE RECKONED AS ROYALTY BECAUSE THE ADVISORY OR ASSISTANCE DOES NOT CONNOTES IMPARTING OF THE SKILL OR EXPERIENCE TO OTHER ALBEIT THE PERSON IS RENDERING THE SERVICES FROM HIS OWN KNOWHOW AND WHAT H E IS IMPARTING IS HIS CONCLUSION BASED ON HIS OWN SKILL AND EXPERIENCE. THE IMPARTING OF KNOWHOW ENVISAGES THAT THE RECIPIENT SHOULD BE ABLE TO MAKE USE OF SUCH KNOWHOW INDEPENDENTLY ON ITS OWN ACCOUNT WITHOUT RECOURSE OF THE P RO VIDER OF THE KNOWHOW IN F UTURE. FOR BEING REGARDED AS ROYALTY THERE HAS TO BE ALIENATION OR USE OF OR RIGHT TO USE OF ANY KNOWHOW AND WITHOUT ANY TRANSFER OF ANY KNOWLEDGE, EXPERIENCE OR SKILL, IT CANNOT BE TERMED AS ROYALTY. IN THE CASE OF GECC ASIA LTD. VS . DDIT ( SUPRA ) HAD OCCASION TO DEAL WITH THE TERM INFORMATION CONCERNING TO INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE AND AFTER REFERRING TO VARIOUS COMMENTARIES, OBSERVED AND HELD AS UNDER: THE ROYALTY PAYMENT RECEIVED AS CONSIDERATION FOR INFORMATION CONCERNING IN DUSTRIAL, COMMERCIAL, SCIENTIFIC EXPERIENCE ALLUDES TO THE CORRECT OF KNOWHOW. THERE IS AN ELEMENT OF IMPARTING OF KNOWHOW TO THE OTHER, SO THAT THE OTHER PERSON CAN USE OR HAS RIGHT TO USE SUCH KNOWHOW. IN CASE OF INDUSTRIAL, COMMERCIAL AND SCIENTIFIC EXP ERIENCE , I F SERVICES ARE BEING RENDERED SIMPLY AS AN ADVISORY OR CONSULTANCY, THEN IT CANNOT BE TERMED AS ROYALTY, BECAUSE THE ADVISOR OR CONSULTANT IS NOT IMPARTING HIS SKILL OR EXPERIENCE TO OTHER, BUT RENDERING HIS SERVICES FROM HIS OWN KNOWHOW AND EX PERIENCE. ALL THAT HE IMPARTS IS A CONCLUSION OR SOLUTION THAT DRAWS FROM HIS OWN EXPERIENCE. THE EMINENT AUTHOR KLAUS VOGEL I HIS BOOK KLAUS VOGEL ON DOUBLE TAX CONVENTION HAS REITERATED THIS VIEW ON DIFFERENCED BETWEEN ROYALTY AND RENDERING OF SERVICES . VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 29 THE THIN LINE DISTINCTION WHICH IS TO BE TAKEN INTO CONSIDERATION WHILE RENDERING THE SERVICES ON ACCOUNT OF INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL AND SCIENTIFIC EXPERIENCE IS, WHETHER THERE IS ANY IMPARTING OF KNOWHOW OR NOT. IF THERE IS NO ALIENATION OR THE USE OF OR THE RIGHT TO USE OF ANY KNOWHOW, THEN IT CANNOT BE TERMED AS ROYALTY. THE SERVICES MAY HAVE BEEN RENDERED BY A PERSON FROM OWN KNOWLEDGE AND EXPERIENCE BUT SUCH A KNOWLEDGE AND EXPERIENCE HAS NOT BEEN IMPARTED TO T HE OTHER PERSON AS THE PERSON RETAINS THE EXPERIENCE AND KNOWLEDGE OR KNOWHOW WITH HIMSELF, WHICH ARE REQUIRED TO PERFORM THE SERVICES TO ITS CLIENTS. HENCE, IN SUCH A CASE, IT CANNOT BE HELD THAT SUCH SERVICES ARE IN NATURE OF ROYALTY. THUS, IN PRINCIPL E WE HOLD THAT IF THE SERVICES HAVE BEEN RENDERED DE - HORS THE IMPARTING OF KNOWHOW OR TRANSFER OF ANY KNOWLEDGE, EXPERIENCE OR SKILL, THEN SUCH SERVICES WILL NOT FALL WITHIN THE AMBIT OF ARTICLE - 12. . IF SUCH SERVICES DO NOT INVOLVE IMPARTING OF KNOWHOW OR TRANSFER OF ANY KNOWLEDGE, EXPERIENCE OR SKILL, THEN IT CANNOT BE HELD TO BE TAXABLE AS ROYALTY 15. THUS, WHAT WE HAVE TO SEE IS , WHETHER THE VARIOUS SERVICES PROVIDED BY ASSESSEE TO VOIPL CAN BE RECKONED AS PROVIDING OF ANY KIND OF IMPARTING OF K NOWHOW OR INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC EXPERIENCE OR NOT. AS HIGHLIGHTED ABOVE, WITH REGARD TO VARIOUS STREAMS OF SERVICES LIKE PROVIDING OF INFORMATION TECHNOLOGY; OPERATIONAL SUPPORT ; MARKETING; QUALITY, HEALTH, SAFETY AND ENVIRONMENT; ESTIMATING AND ENGINEERING ; AND PERSONAL AND ORGANIZATION, ADMINISTRATION AND LEGAL SERVICES, T HERE IS NO IMPARTING OF ANY KIND OF KNOWLEDGE, SKILL OR EXPERIENCE BY WAY OF INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SCIENTIFIC WHICH IS MA DE AVAILABLE TO VOIPL. FOR INSTANCE , INFORMATION TECHNOLOGY SERVICES ARE PROVIDED FOR USE OF GROUP COMPANIES COMPUTER SYSTEM WHERE IT TEAMS PROVIDING MANUAL GENERAL INFORMATION WITHOUT PROVIDING ANY INFORMATION OR METHOD TO DESIGN OR CREATE A COMPUTER SYS TEM. IT IS MAINLY KIND OF HELP DESK AND VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 30 TROUBLE - SHOOTING SERVICES WHICH ARE REQUIRED ON REGULAR BASIS. FOR OPERATIONAL SUPPORT SYSTEM ALSO , IT MAINLY PROVIDES FOR CHECK - LIST FOR PROJECT PLANS, SAFETY WORK AND INSPECTION PLANS ETC. SIMILARLY, FOR MARKETING, THE ASSESSEE PROVIDES FOR E - MARKETING THROUGH ITS WEBSITE AND MAINTAINING IT, PRINTING AND PUBLISHING BROCHURES WHICH CAN BE DISTRIBUTED TO ITS POTENTIAL CLIENTS . IT ALSO HELPS VOIPL TO OBTAIN THE CERTIFICATE OF APPROVAL FROM THE CONCERNED ORGANIZATIONS A ND OBTAINED THE CONTRACTS ON THE REGULAR BASIS. REGARDING QUALITY HE A L TH AND SAFETY ENVIRONMENT SERVICES , THE ASSESSEE MERELY CONDUCTS INTERNAL AUDITS ON REGULAR INTERVALS SO THAT PROPER ADHERENCE TO SUCH QUALITY STANDARD AND PROCEDURES ARE VALID / SHOULD R EMAIN VALID . SIMILARLY, IN THE ESTIMATING AN ENGINEERING SERVICES AND OTHER SERVICES ALSO, THE ASSESSEE IS MAINLY PROVIDING TENDER PROCESS, HELPING AND PREPARING (ESTIMATES) AND BIDS AND PLAN CONSISTING IN LOCAL PERFORMANCE AND OTHER GUARANTEES TO THE CLIE NT OF VOIPL ETC. FOR RENDERING OF THESE SERVICES, THERE IS NO ELEMENT OF IMPARTING OF ANY KNOWHOW OR THERE IS TRANSFER OF ANY KNOWLEDGE, SKILL OR EXPERIENCE. THU S, IN OUR OPINION, NONE OF THE SERVICES PROVIDED BY THE ASSESSEE IN THE TERM OF SERVICE AGRE EMENT FALL S WITHIN THE SCOPE AND AMBIT OF ROYALTY AS DEFINED IN ARTICLE 12(4) OF THE DTAA. 1 6 . IN ANY CASE, AS POINTED BY MR. PORUS KAKA , IT IS AN ADMITTED FACT THAT, ONLY ACTUAL MARK - UP HAS BEEN CHARGED BY THE ASSESSEE AND THE PAYMENT HAS BEEN RECEI VED PURELY ON ALLOCATION OF ACTUAL COST S AND THE WORKING OF COST ALLOCATION AS REPRODUCED ABOVE HAS NOT BEEN DISPUTED EITHER BY THE ASSESSING OFFICER OR BY THE LD. DRP. THE ASSESSEE HAS CHARGED THE SPECIFIED PERCENTAGE OF COST INCURRED BY IT FOR VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 31 RENDERING AFORESAID SERVICES WHICH IS BASED ON TURNOVER OF EACH ENTITY AND THE TURNOVER OF VAN OORD GROUP AS HIGHLIGHTED ABOVE WHICH HAS BEEN CERTIFI ED BY THE AUDITORS AS GIVEN IN THE PAPER BOOK FROM PAGES 9 TO 11. ONCE THE AUDITORS HAVE CERTIFIED THAT, SUCH ALLOCAT ION OF COSTS REPRESENTS THE ACTUAL EXPENDITURE S THEN , WE DO NOT FIND ANY REASON TO HOLD THAT REIMBURSEMENT OF THE COST CAN BE RECKONED AS PAYMENT TOWARDS ROYALTY . AS REGARDS THE DECISION OF ITAT CHENNAI BENCH IN VAN OORD VS . DIT ( SUPRA ) , WE AGREE WITH TH E CONTENTION OF THE LD. SENIOR COUNSEL THAT THE SAID DECISION IS NOT APPLICABLE FOR THE REASONS HIGHLIGHTED BY HIM AND ALSO , WE O URSELVES HAVE ANALYZED EACH AND EVERY ASPECT OF SERVICES RENDERED BY THE ASSESSEE IN TERMS OF THE SERVICE AGREEMENT AND ALSO ANALYZED THE DEFINITION OF ROYALTY AS GIVEN IN ARTICLE 12(4) AND HAVE REACHED TO A CONCLUSION THAT THE SAID SERVICES AND REIMBURSEMENT OF COST DOES NOT FALL UNDER THE REALM OF ROYALTY . MOREOVER HERE IN THIS CASE, THE REVENUE S MAIN THRUST IS THAT THE P AYMENT RECEIVED BY THE ASSESSEE FROM VOIPL IS ROYALTY AND HERE IT IS NOT THE CASE OF FTS BY THE DEPARTMENT AND, THEREFORE, WE ARE REFRAINING OURSELVES FROM GOING INTO THE ASPECT OF FTS QUA THE SERVICES RENDERED IN TERMS OF THE SERVICE AGREEMENT. 1 7 . NOW , COMING TO THE ISSUE OF TAXABILITY OF REIMBURSEMENT OF SALARY AS FTS UNDER ARTICLE 12(5), WE FIND THAT THE ASSESSEE HAS PAID SALARY FOR SUMS AGGREGATING TO RS.2,22,39,000/ - WHICH HAS BEEN CLASSIFIED UNDER THE FOLLOWING HEADS: - SALARY TO CREW MEMBERS OF D REDGER VOLVOX DELTA - RS.16,214,187 ; AND SALARY TO CREW MEMBERS OF DREDGER VOLVOX ATLANTA - RS.6,024,959 . VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 32 ON PAGES 147 AND 148 OF THE PAPER BOOK, THE ASSESSEE HAS GIVEN THE EMPLOYEE - WISE BREAK - UP OF SALARY ALONG WITH RESPECTIVE DAYS OF STAY IN INDIA FOR THE CR EW MEMBERS ON VOLVOX ATLANTA AND IT IS AMPLY EVIDENT THAT STAY OF NONE OF THE CREW MEMBERS IN INDIA HAS EXCEED ED 90 DAYS. SIMILARLY, WITH RESPECT TO REIMBURSEMENT OF SALARY OF CREW MEMBERS VOLVOX DELTA ALSO IT IS SEEN THAT THE DAYS OF STAY AGAIN DOES NOT E XCEED 90 DAYS. RATHER IT IS ONLY FOR THE PERIOD OF 35 DAYS. THIS IS EVIDENT FROM THE CERTIFICATE ISSUED BY THE DIRECTOR GENERAL OF SHIPPING DATED 10 TH SEPTEMBER, 2009 GIVEN TO VOIPL . ONCE THAT IS SO, THEN IN TERMS OF SECTION 10(6)(VIII) WHICH READS AS UN DER: - (VIII) ANY INCOME CHARGEABLE UNDER THE HEAD SALARIES RECEIVED BY OR DUE TO ANY SUCH INDIVIDUAL A NON - RESIDENT AS REMUNERATION FOR SERVICES RENDERED IN CONNECTION WITH HIS EMPLOYMENT ON A FOREIGN SHIP WHERE HIS TOTAL STAY IN INDIA DOES NOT EXCEED I N THE AGGREGATE A PERIOD OF NINETY DAYS IN THE PREVIOUS YEAR. THE SALARY PAID TO SUCH NON - RESIDENT CANNOT BE TAXED IN INDIA. ONCE THE SALARY CANNOT BE TAXED IN INDIA THE SAME CANNOT BE BROUGHT IN THE AMBIT OF FTS UNDER ARTICLE 12(5). THUS, ON THIS GROUND ALONE, WE ARE OF THE OPINION THAT THE REIMBURSEMENT OF SALARY PAID TO THE NON - RESIDENT IS EXEMPT FROM TAXABILITY IN INDIA BY VIRTUE OF SECTION 10(6)(VIII) AND, THEREFORE, SAME CANNOT BE HELD TO BE FTS. ACCORDINGLY, THE ADDITION MADE BY THE ASSESSING OFFICE R ON THIS SCORE STANDS DELETED . 18. SO FAR AS THE ISSUE OF SET OFF OF UNABSORBED DEPRECIATION AND LOSSES IS CONCERNED , NOW IN LIGHT OF OUR FINDING GIVEN ABOVE, WE DIRECT THE ASSESSING OFFICER TO FOLLOW THE PROVISION VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 33 OF SECTION 115A(3) AND 32(2) AFTER GI VING THE EFFECT TO OUR DECISION AS ABOVE. AS REGARDS THE UNABSORBED LOSSES, THE SAME HAS NOT BEEN PRESSED BEFORE US AND ACCORDINGLY, THE SAME IS DISMISSED . 19. LASTLY, REGARDING LEVY OF PENALTY UNDER VARIOUS SECTIONS , AS STATED IN THE STARTING OF THE OR DER , WE HAVE ALREADY HELD THAT THESE GROUNDS ARE PREMATURE AND, THEREFORE, NO ADJUD IC AT I ON IS REQUIRED. 20 I N VIEW OF OUR FINDING GIVEN ABOVE, THE APPEAL OF THE ASSESSEE IS TREATED AS PARTLY ALLOWED. 21 . IN THE RESULT, APPEAL OF THE ASSESSEE STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH OCTOBER , 2016 . SD/ - SD/ - ( . . ) ( ) ( G S PANNU ) ( AMIT SHUKLA ) ACCOUNTA NT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 7 TH OCTOBER, 2016 / COPY TO: - 1 ) / THE APPLICANT . 2 ) / THE RESPONDENT. 3 ) THE DRP - I / CONCERNED____ , MUMBAI , 4 ) THE CIT II I /DY. DIRECTOR (INT. TAX) - 30 , C ONCERNED , M UMBAI . 5 ) , , / THE D.R. L BENCH, MUMBAI. 6 ) COPY TO GUARD FILE . /BY ORDER VAN OORD DR EDGING AND MARINE CONTRACTORS BV ITA NO. : 7589 /MUM/201 2 34 / / TRUE COPY / / / , DY./ASSTT. REGISTRAR I.T.A.T., MUMBAI * . . *CHAVAN, SR. PS